Is It Time To Buy Gold?

After last week's sell off, the stock market is rebounding, but don't let that fool you says one expert. According to Philip Silverman, investors should take advantage of the rally to sell out of their stock positions and buy gold. This is a dramatic shift from what some other experts are recommending. For more on this, continue reading the following blog post from Tim Iacono.

Following the remarkable rebound in the price of gold last Friday as other asset prices tumbled, a fresh round of mostly positive views of the metal as an investment have been popping up in the mainstream financial media (no word yet on any change in the views of Warren Buffett or Charlie Munger), highlighted this morning by a section title in this CNBC report that appears above and below.

It’s kind of stunning, actually, to see this sort of thing at CNBC, but it seems a good number of analysts think yesterday’s stock market rally will prove fleeting – more an opportunity to sell stocks than a reason to buy them – with some going so far as to suggest directing those proceeds toward the yellow metal.

Sell Everything Else and Buy Gold
Philip Silverman, Managing Partner Kingsview Management, said investors should use the “snapback” rally to sell stocks and commodities.
The only thing that investors should be looking to add is gold, which will benefit from further monetary easing, Silverman said.
“We would expect that there is going to be some sort of movement out of the ECB… some sort of movement out of the U.S. to continue doing their stimulus, which really hasn’t done anything substantial but they’ll continue to try,” Silverman told CNBC Asia’s “Squawk Box.”
…
Burkhard Varnholt, Chief  Investment Officer and Head of Asset Management at Sarasin Bank, also told CNBC he believes the precious metal will gain because of its status as an alternative currency. 
“I think gold ultimately will hit $2,000 and there are two reasons behind that,” Varnholt said. “One is continued central bank buying from Asia who are looking to diversify out of euro zone dollars and then because investors are concerned about fiscal recklessness.”

It may turn out that last Friday’s labor report was more important for how people see gold than for how people see the U.S. economy as the months-long derision about the metal not being a safe haven seems to have quickly been forgotten after it went up on that day and everything else went down.

The gold price is going up again today after China slashed interest rates and prior to Fed Chief Ben Bernanke telling Congress how he sees things. Given the change in sentiment expressed by Federal Reserve officials already this week, look for The Bernank to indicate his money printing trigger finger is getting itchy.

This blog post was republished with permission from Tim Iacono.

The Fed's Balance Sheet Leverage

The Federal Reserve's balance sheet is leveraged 50-to-1 against it's capital, which is a greater leverage ratio than Fannie Mae or Bear Stearns. The Fed made an accounting change several weeks ago that will allow any losses to be reported as a new line item. Read more about this in the full post by The Mess That Greenspan Made.

John Hussman’s weekly commentary had this little item in it the other day about how the Federal Reserve’s balance sheet would look if it were viewed as something other than the assets and liabilities of the central bank of the world’s only superpower, with all the attendant rights and “make-it-up-as-you-go” privileges.

As a side note, it’s probably worth noting that the Federal Reserve has already pushed its balance sheet to a point where it is leveraged 50-to-1 against its capital ($2.65 trillion / $52.6 billion in capital as reported the Fed’s consolidated balance sheet ). This is a greater leverage ratio than Bear Stearns or Fannie Mae, with similar interest rate risk but less default risk. The Fed holds roughly $1.3 trillion in Treasury debt, $937 billion in mortgage securities by Fannie and Freddie, $132 billion of direct obligations of Fannie, Freddie and the FHLB, and nearly $80 billion in TIPS and T-bills. The maturity distribution of these assets works out to an average duration of about 6 years, which implies that the Fed would lose roughly 6% in value for every 100 basis points higher in long-term interest rates. Given that the Fed only holds 2% in capital against these assets, a 35-basis point increase in long-term yields would effectively wipe out the Fed’s capital.

To avoid the potentially untidy embarrassment of being insolvent on paper, the Fed quietly made an accounting change several weeks ago that will allow any losses to be reported as a new line item – a “negative liability” to the Treasury – rather than being deducted from its capital. Now, technically, a negative liability to the Treasury would mean that the Treasury owes the Fed money, which would be, well, a fraudulent claim, and certainly not a budget item approved by Congress, but we’ve established in recent quarters that nobody cares about misleading balance sheets, Constitutional prerogative, or the rule of law as long as speculators can get a rally going, so I’ll leave it at that.

Yes, it’s tough being a bear after a 2+ year long stock market rally and being reminded from time to time that, when Fed Chief Ben Bernanke puts his head on the pillow at night, he probably giggles to himself every once in a while, “I am the invisible hand” (hat tip DC).

This post was republished with permission from The Mess That Greenspan Made.